Sixth Annual
In-House Counsel Conference
Panel 1
Contracts – Is that a Contract, or are
You Just Trying to Confuse Me?
Presenters
 Mike Bartyczak, Senior Counsel, Smile Brands
Inc.
 Kresimir Peharda
 Florence Pinigis, Senior Attorney, Southern
California Edison Company
 Cherie S. Raidy, Partner, Foley & Lardner LLP
 Moderator – Steven Mashal, IP Attorney
2
Overview
 Best Efforts Provisions
 Ambiguity in Contracts
 Miscellaneous Contract
Provisions
3
Best Efforts Provisions:
Pitfalls and Practice Pointers
Kresimir Peharda
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Introduction
 Attorneys believe the meaning of best efforts is
clear. Case law says otherwise.
 Parties who carelessly use "best efforts"
provisions run the risk of injecting a significant
amount of uncertainty into their contracts. This
situation can lead to many problems relating to
the performance required of the promisor.
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Best Efforts Provisions
 Some iterations of best efforts:
 good-faith efforts
 diligent efforts
 commercially reasonable and diligent efforts
 reasonable efforts
 every effort
 reasonable best efforts
 good-faith best efforts
 commercially reasonable efforts
 commercially reasonable best efforts
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Best Efforts Provisions
 Where do best efforts provisions fit within the
contract problem universe?
Ambiguity
Inconsistency
Conflict
Vagueness
Best Efforts
Redundancy
Imprecision
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Evaluating Best Efforts
Provisions
 Approaches courts have used to evaluate the
term:
1. Let the trier of fact/jury decide (See First
National Bank of Lake Park v Gay, 694 So. 2d
784 (Fla. 4th D.C.A. 1997)).
2. Impose a mere good faith standard, or if there
is no mutuality of obligation, then decide that
there is no legal obligation (adopted by Illinois
courts).
3. Impose a greater than good-faith, but less than
fiduciary duty standard (See Bloor v. Falstaff
Brewing Corp., 601 F.2d 609 (2d Cir. 1979)).
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Problems
 Specific problems encountered
1.
2.
3.
4.
Unanticipated peer/industry comparisons
Heightened trial risks and expenses
Conflicts of interest
Restrictions on one’s own business
opportunities
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Problems
 Unanticipated peer/industry comparisons
 Example: Carlson Dist. Co. v. Salt Lake Brewing
Co., L.C., 95 P.3d 1171 (Utah App. 2004)
 The parties entered into a distribution agreement
whereby Carlson was obligated to use its best efforts in
the sale, marketing, and distribution of Salt Lake’s beer
 The Court held that best efforts is primarily a subjective
standard, but the actions and capabilities of others may
be relevant
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Problems
 Conflicts of interest
 Example: Bloor v. Falstaff Brewing Corp
 Falstaff (buyer) was required to use its best efforts to
promote and maintain a high volume of Ballantine beer
sales
 The Court held that while Falstaff was not required to
spend itself into bankruptcy promoting the beer, Falstaff
could not focus on profit exclusively without giving fair
consideration to the effect on the volume of Ballantine
beer sales
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Practice Pointers
 Carefully evaluate all contracts using "best
efforts" language to determine the potential
effects of the inherent vagueness/ambiguity for
your client.
 Define the term once in the agreement and use
that definition throughout.
 If, however, you use two or more standards in
an agreement, make sure that it is intentional
and that the different standards are defined.
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Practice Pointers
 If the promisor’s level of effort is important,
consider inserting a benchmark against which
the promisor’s effort can be evaluated:
 Efforts used by the promisor in connection with
other contracts imposing an efforts standard
 How the promisor would have acted if the
promisor and promisee were united in the same
entity
 Industry practice
 Specific industry peers or companies meeting
similar financial metrics
13
Practice Pointers
 If for some reason you choose not to define the
efforts term and you need a middle ground,
consider using reasonable efforts.
 Recognize that agreements in the following
areas will often raise the effort issue:
 Securities offerings
 Distribution and marketing
 Licensing and franchising
 Mergers and acquisitions
 Real estate leases
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Ambiguity
Florence Pinigis
Michael A. Bartyczak
15
Overview



Part 1: What is ambiguity?
Part 2: What are the
consequences of a contract
provision being considered
ambiguous?
Part 3: How can you avoid
ambiguity?
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Part 1: What is ambiguity?
 Not usually the focus of attention---instead,
focus of attention is on the effects of ambiguity
 As a result, contract litigation may center on
whether a provision should be viewed as
“ambiguous” or “unambiguous”
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What is ambiguity?
 A basic definition that may be useful:
“ambiguity” is an uncertainty of meaning
where an expression is used in a written
instrument.
 Ambiguity may result from language that has
two meanings or where the meaning is not
clear or definite.
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What is ambiguity?
 Is there any practical way that can help to
determine if specific language is likely to be
considered ambiguous?
 Try this two part test:
 Is the language capable of two or more
conflicting interpretations, each of which would
be considered a reasonable interpretation of the
language?
 Does the language lack a critical term?
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Identifying Conflicting
Interpretations
 Conflicting interpretations usually arise in two
ways:
 The contract doesn’t sufficiently define a key
term
 Classic Example: the so-called Peerless case, where
the contract provided for the purchase of cotton from the
ship Peerless for a set price. But there were two ships
named Peerless (that sailed from Bombay with cotton a
few months apart) so contract was held to be nonbinding.
 The contract contains conflicting provisions
 Words and numbers describing the purchase price are
different
 Legal description and address for property differ
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Identifying Missing Terms
 The absence of a critical term can render a
contract ambiguous when it creates confusion
about a party’s rights under the contract
 Examples of critical terms: price, time for
performance or subject matter of the contract.
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Classifying Ambiguity
 Ambiguity is often classified based on how the
ambiguity is identified: Does the ambiguity
arise from the face of the contract or is it only
identified as a result of extrinsic evidence?
 “Patent” ambiguity---arises on the face of the
contract (such as where the words and
numbers to establish the contract price differ)
 “Latent” ambiguity---occurs when language
that appears to be unambiguous on its face is
shown by extrinsic evidence to be ambiguous
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Part 2: Effect of ambiguity
 Ambiguity is usually the basis for disputes
between parties to a contract.
 When the dispute gets into litigation, it is
generally first considered to be a question of
law for the trial court.
 But where the contract itself is not well
defined, however, a court may hear parol
evidence to determine what the parties
intended to include as a part of the contract.
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Treatment of Missing Terms
 As noted above, if a missing term is
considered absolutely essential to the
contract, then the absence of such a term can
nullify the contract.
 In other cases, a court will attempt to supply a
term that is reasonable under the
circumstances.
 In order to supply a missing term, a court will
usually look first at the contract itself (applying
Rules of Construction, as necessary).
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Treatment of Missing Terms
(cont.)
 But if the intent of the parties cannot be
determined in this way, then a court may look
at parol evidence to supply the missing term.
 Where there is a clear integration clause,
however, parol evidence is usually not allowed
to supply the missing term (Restatement
Section 204)
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Treatment of Conflicting Terms
 The Restatement of Contracts does not provide
clear direction when an ambiguity arises from
conflicting terms.
 A court may look at contract construction or at
parol evidence, but will not usually look at
parol evidence where there is an integration
clause
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Part 3: Ways to avoid
ambiguity
 Patent ambiguity may be avoided by
consistency in the use of terms where the
same meaning is intended. This can be made
easier by the use of definitions and rules of
interpretation.
 Latent ambiguity may be avoided by an
integrated agreement with an integration
clause.
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Addressing Patent Ambiguity
 Consistency is one of the keys to avoiding
conflicting language within the contract itself.
 Defining terms and then using them in the way
that they have been defined is important.
 Also may be useful to set forth rules of
interpretation within the contract itself.
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Definition of Terms
 May be defined in a single location or when each
term is first used in the contract
 With longer contracts, if terms are defined when
they are first used then a list of the term and the
sections where the definition can be found is
useful.
 Review the terms to identify which terms are
related and attempt to eliminate any overlap
between them
 Consider whether undefined terms (usually
technical terms) should be interpreted in
accordance with the meaning given to such term in
a specified industry or whether the ordinary
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meaning should be used.
Creating Rules of Interpretation
 Rules of interpretation can be used to
supplement definitions by explaining how
words are being used in the contract.
 Rules of interpretation can also establish an
order of priority among provisions within the
contract and among the contract terms and
language that may be included in exhibits,
appendices or attachments to the contract that
are incorporated by reference into the contract.
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Supplementing Definitions by
Rules
 Examples
 Use of the word “includes” means “including
without limit”
 Gender of all words include the masculine, feminine
and neuter, and the number of all words include the
singular and plural.
 The terms “hereof,” “herein,” “hereto” and similar
words refer to the entire contract and not to any
specific subpart of the contract.
 References to any law, statute, rule, regulation,
notification or statutory provision shall be construed
as a reference to the same as it may have been, or
may from time to time be, amended, modified or
re-enacted.
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Supplementing Definitions by
Rules
 Examples (cont.)
 References to any person shall be construed as a
reference to such person’s successors and permitted
assigns.
 Any reference to the “reasonable judgment”,
“reasonable consent”, or “reasonable approval”, or
to any words of similar effect, shall be interpreted to
be subject to the requirement that such judgment,
approval, or consent (a) not be unreasonably
withheld or delayed, and (b) be in accord with any
applicable standards associated with the exercise of
such judgment, consent or approval, unless
specifically stated to the contrary.
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Establishing Which Provisions
Govern by a Rule
 Examples (cont.)
 Headings are for convenience only and are not to be
used for interpretation.
 A reference to this contract or to a part of this
contract shall include any authorized amendments,
modifications, supplements, replacements or
restatements thereto.
 In case of conflict, the order of precedence for
interpretation between the parts of this contract shall
be: [usually body of contract over appendices, but
not always]. And any amendment to the above listed
documents shall have priority over the document it
amends, and any amended document shall have the
same precedence classification as set forth above.
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Establishing Which Provisions
Govern by a Rule
 Examples (cont.)
 In the event of a conflict (a) among, or within, any
provisions within any one of the levels set forth
in the foregoing order of precedence, and/or (b)
among laws and standards identified as
applicable to this contract, then the party
identifying such a conflict shall notify the other
party and the parties, within a reasonable time
thereafter, will agree on an interpretation. Until
such an interpretation is agreed upon, the
assumption will be that the more stringent
requirement applies.
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Addressing Latent Ambiguity
 As discussed, latent ambiguity is identified by
reference to extrinsic evidence.
 As a result, latent ambiguity can be addressed
by provisions in the contract that expressly
exclude parol evidence. Typically, an
integration clause is used for this purpose.
 A valid integration clause will bar the use of
extrinsic oral or written evidence of prior or
contemporaneous agreements to add to or
modify the contract. (see Materson v. Sine, 68
Cal.2d 222 (1968))
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What Is an Integration Clause?
 An integration clause states the parties intent
that the contract itself be treated as the
agreement between the parties.
 Typical parts:
 Identification of what comprises the “contract”
 Statement that the parties intend the contract to
be treated as final and complete
 Statement that prior or contemporaneous written
or oral statements are not a part of the contract
 Statement that no reliance is being made on
other representations
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Effect of an Integration Clause
 In the absence of an allegation of fraud in the
inducement, an integration clause is likely to
bar the introduction of extrinsic evidence and
thereby will prevent a finding of a latent
ambiguity under the contract.
 But claims related to fraud in the inducement
may justify use of extrinsic evidence to nullify
a contract, even when the contract has an
integration clause, unless the allegedly false
promise directly contradicts the written
language.
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Effect of an Integration Clause
 If the contract is silent on an alleged false
promise, then the integration clause will not
prevent the introduction of extrinsic evidence
where fraud is alleged.
 So, in addition to an integration clause, you
also need to address key terms in the contract
(or the integration clause may not have its
desired effect).
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Responding to a
Draft Integration Clause
 Many “take-it or leave-it” contracts include an
integration clause
 Where you feel pressure to sign a contract with
this language, consider incorporating helpful
appendices into the definition of the contract.
 Where such appendices contain language that
differs from the language in the contract itself,
consider including an order of priority
provision
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Ways to Exclude Extrinsic
Evidence
 Sometimes a contract will not include an
integration clause but excludes certain types
of extrinsic evidence, such as past practice or
course of dealing.
 Typically, this is done when there is a long
relationship between the parties and the new
contract has modified the past relationship in a
significant way.
 A provision excluding past practices or
courses of dealing can prevent a party from
showing that what was actually done under the
contract should govern over the contract
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language.
Miscellaneous Contract
Provisions
Cherie S. Raidy
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QUESTIONS?
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Contact Information
 Michael A. Bartyczak, Smile Brands Inc.
 mike.bartyczak@brightnow.com
 Kresimir Peharda
 (626) 230-7422, kresimir@adriapacific.com
 Florence Pinigis, Southern California Edison
Company
 (626) 302-3959, florence.pinigis@sce.com
 Cherie S. Raidy, Foley & Lardner, LLP
 (213) 972-4554, craidy@foley.com
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